The Job Market Enigma
Virtually every conversation I have had with a business owner or executive in the last few weeks includes the lament that they desperately need and cannot, for love or money, hire new employees. Despite the high level of demand, U.S. employers added a fairly modest 266,000 jobs in April, well below the 1 million jobs anticipated by economists. This is yet another conundrum as we reboot our economy in fits and starts. Certainly, one reason for soft hiring numbers are supply shortages that have curtailed production. Auto manufactures appear to have fallen victim to their aggressive “just in time” inventory practices and have had to idle assembly lines due to semiconductor shortages, even in the face of huge demand for vehicles. Jobs in motor vehicles and parts fell by 27,000 in April.
On a brighter note, employment in leisure and hospitality increased in April by 331,000, bringing the total jobs added in the last year to 5.4 million. The sector remains down 2.8 million jobs from February 2020.
The labor force participation rate improved just slightly as the civilian labor force increased by 430,000. So although employment increased by 328,000 jobs, the unemployment rate rose to 6.1% from 6% in March. Among those not in the labor force in April, 2.8 million persons were prevented from looking for work due to the pandemic. This measure is down from 3.7 million the month before. To be counted as unemployed, by definition, individuals must be either actively looking for work or on temporary layoff. In April, 9.4 million persons reported that they had been unable to work because their employer closed or lost business due to the pandemic. This measure is down from 11.4 million in the previous month.
Here is the enigma, if there are millions unemployed, why are employers having such difficulty attracting employees? Rising vaccination rates, easing restrictions, and significant federal stimulus are fueling consumer spending on goods and services. Yet employers in sectors like manufacturing, transportation, and construction are struggling to find workers. The shortage of workers threatens to curtail what is otherwise shaping up to be a vigorous post-pandemic recovery. Higher wages necessary to attract and retain employees could also inflate prices or reduce profit margins.
There are those who feel the problem stems from the fact that employers are having difficulty competing with enhanced unemployment benefits. The COVID-19 relief bill, the American Rescue Plan passed in March, provided four COVID-19 related unemployment benefit programs through September 6, 2021. These include targeted protection for self-employed individuals not typically eligible for unemployment benefits, a weekly benefit of $100 for “mixed earners,” an increase in the number of weeks of unemployment eligibility, and supplemental federal benefits of $300 per week. The average level of state unemployment insurance is $378 per week. When combined, these benefits equate to roughly $17 per hour in pay. Under normal circumstances, those claiming unemployment insurance need to certify that they are actively seeking employment. An emergency rule waived that requirement. However, the rules also state that refusing work offered to you results in ineligibility for benefits. This mainly applies in circumstance where an employee was furloughed and declined to return once recalled. It is quite possible, even likely, that this extended benefit is sidelining some job seekers.
Some of this puzzling job market can be explained by a mismatch in employee skills and available positions. The pandemic affected industries dramatically differently, devastating some and glancing off others. The impact on employment has been what many economists refer to as reallocation shock — a situation requiring substantial reallocation of labor and skills, which can require a significant amount of time. One indication that the pandemic might have increased the need for labor reallocation is the fact that even while unemployment increased significantly, companies are reporting increases in job openings. We can measure this by comparing the unemployment rate, which remains elevated, to the level of the Job Openings and Labor Turnover Survey (JOLTS), which is currently at an all-time high. In a sense, unemployment and vacancies have recently been sending conflicting signals about the state of the labor market. The increase in unemployment in 2020 reflects the dramatic deterioration in job availability for workers, most especially in leisure and hospitality. Normally when that happens, the hiring environment should be easier. However, the increase in job vacancies suggests that hiring has actually become more difficult.
There are three likely reasons for this simultaneous increase of unemployment and job vacancies. One is that available benefits make it financially feasible to not work for the time being. The second is that the pandemic continues to disrupt the ability of some to seek or accept work. The third is a mismatch between the characteristics of the unemployed workers and those of the job openings. This can either be a skillset issue or simply that workers have yet to seek jobs outside of the industry in which they were previously employed. In all three cases, it is likely just a matter of time before benefits expire, pandemic conditions further improve, or workers retool skills and transition to different industries where jobs are more plentiful.
The Inflation Question
The second most frequent query is, “What are we doing to protect against higher inflation?” As we ramp our economy back up to speed, shortages and supply chain disruptions are causing higher prices for goods and services. Prices for oil, crops, and other commodities have risen sharply this year. The toilet paper shortage of a year ago was replaced by a chicken wing crisis. On May 13, we will get our next key reading on inflation with the release of the April Consumer Price Index (CPI). Consensus estimates are for a year-over-year rise of 3.8% in the CPI with a core (ex-food and energy) increase of 2.2%.
Some of our frequent readers will recall a piece on inflation published in September 2020. In it we explored the impacts and causes of inflation. At the time of that article, the Federal Reserve had announced a shift in its objectives to target a more flexible form of average inflation targeting. In short, the Fed signaled a willingness to allow inflation to run a bit hotter over the short run to achieve an average target over time. The Federal Reserve wants to encourage a moderate increase in inflation and is holding interest rates low until that objective is achieved. In the short run, a period of modestly higher inflation would not be historically memorable. However, an extended period of higher inflation above 3% would be problematic. At this time, despite some painful pockets of elevated prices, the Federal Reserve expects inflationary pressures to be temporary.
Historically speaking, the top-performing asset classes in an environment with rising inflation are emerging market equities, commodities including gold, domestic equities, and REITs. Our investment portfolios are currently weighted to favor equities over fixed income and cash across the range of our various investment objectives. We continue to evaluate additional investment strategies and opportunities that may provide us with additional protection against a changing environment.